OPEC+ Plans Production Cuts | 04 Sep 2024

Source: TH

Why in News?

The recent announcement of Organization of the Petroleum Exporting Countries (OPEC)+ countries to cut oil production has raised concerns regarding global oil markets and India's energy security. 

• With India's fuel consumption which is around 4.8 million barrels per day in 2024 is expected to reach 6.6 million barrels per day by 2028, these cuts may push Indian refiners to source more crude from the Americas, highlighting shifts in global oil trade.

Why is OPEC+ Planning to Cut Oil Production?

• Market Stabilisation: OPEC+ aims to stabilise and boost oil prices by cutting production, addressing fluctuating demand and oversupply. 
  • This strategy is intended to enhance revenue for oil-producing countries amid economic uncertainties and geopolitical tensions.
• Response to Non-OPEC Supply Increases: The International Energy Agency (IEA) forecasts a significant increase in non-OPEC+ crude supply, particularly from the US, Canada, Brazil, and Guyana. 
  • This influx challenges OPEC’s market share, prompting the group to implement cuts to maintain price stability.
• Respond to Geopolitical Tensions: Rising geopolitical tensions, such as conflicts in the Middle East and disruptions in shipping routes, ongoing sanctions on Russian crude exports have impacted oil supply and prices. 
  • OPEC+ aims to address these challenges through coordinated output cuts.
• Long-term Strategy: OPEC+ aims to ensure sustainable production levels and prevent market crashes, which can occur when supply exceeds demand. By controlling output, they are attempting to create a more predictable and stable market environment.

What are the Implications of OPEC+ Oil Production Cuts?

• Global Oil Prices: 
  • A reduction in OPEC+ output is likely to lead to higher oil prices globally. This can result in increased costs for importing countries, impacting inflation rates and economic growth.
• Implications for India:
  • Shift in Supply Dynamics: With OPEC+ reducing production, India may increase crude oil imports from non-OPEC+ countries like the US, Canada, Brazil, and Guyana. This shift could diversify India's import sources, reducing reliance on West Asian crude oil.
    • This diversification strategy is crucial as West Asian imports have already declined from 2.6 mb/d in 2022 to 2 mb/d in 2023.
  • Potential for Price Volatility: For India, diversifying the range of suppliers can enhance energy security, but increased reliance on non-OPEC sources may expose India to price fluctuations in these markets, potentially leading to higher import bills and impacting the trade balance.
    • India is the world’s third-largest consumer of crude oil (after the US and China) with a high import dependency level of over 85%.
  • Economic Growth: Higher oil prices can strain the Indian economy, particularly sectors reliant on oil. This could lead to increased transportation costs and inflation, affecting overall economic stability.

What are the Projected Trends in India's Liquid Fuels Consumption and Capacity Expansion?

• Growing Fuel Consumption: India's consumption of liquid fuels is expected to grow significantly, with projections indicating an increase from 5.3 mb/d in 2023 to 6.6 mb/d by 2028, a rise of 26% over five years. 
  • This growth is attributed to various economic factors, including population growth, GDP growth, and rising GDP per capita. 
  • The EIA estimates that annual growth in liquid fuels consumption will average between 4% and 5% until 2037.
• Capacity Expansion: India has expanded its refining capacity by 1.3 mb/d between 2011 and 2023 and plans further expansions to meet rising domestic fuel demand. 
  • By 2028, 11 new crude oil capacity projects are expected, including the 1.2 mb/d Ratnagiri mega project. 

What are the Major Challenges in India's Energy Sector?

• Energy Security and Import Dependency and Geopolitics: India relies on imports for over 75% of its oil needs which is projected to exceed 90% by 2040. This growing dependency on volatile international markets poses significant risks.
  • Increasing dependence on imported oil has placed India's energy security under severe strain, and geopolitical disruptions such as Russia-Ukraine war and US, UK and EU sanctions over Russia have exacerbated the problem. Russian crude accounted for nearly 36% of India’s oil imports in FY24.
  • India's energy transition to renewable energy faces challenges, including its dependency on China for renewable technologies and related raw materials.
• Domestic Production Decline: India's crude oil production has declined since 2011-12 due to insufficient investment in exploration and ageing oil fields.
  • It declined from 32.2 million tonnes in 2019-20 to 29.2 million tonnes in 2022-23, according to government data.
• Infrastructure Bottlenecks: Limited pipeline infrastructure and storage facilities hinder the efficient transport and distribution of crude oil in India. 
  • It also includes issues such as land acquisition bottleneck, disinvestment, demand surge, lack of management skills, delay in regulatory clearances, climate change, under-investment bottleneck, etc.
• Rising Import Bill: India's economy is susceptible to global oil price fluctuations, resulting in rising import bills that threaten fiscal stability. 
  • India's net oil import bill is projected to reach USD 101-104 billion in FY25, up from USD 96.1 billion in FY24 which could negatively impact the economy by widening the current account deficit (CAD) and potentially causing higher inflation and fiscal deficits if not properly managed.

Way Forward

• Strengthening Bilateral Relations: India should focus on strengthening bilateral relations with oil-producing nations in the Americas to secure stable and favourable supply agreements.
• Investment in Domestic Refinery Capacity: Continued investment in refining capacity is essential. With plans for up to 11 new projects by 2028, India must prioritise these developments to enhance self-sufficiency and meet growing demand.
• Strategic Reserves: Building strategic petroleum reserves can provide a buffer against supply disruptions and price shocks, ensuring energy security during volatile market conditions.
• Diversification of Energy Sources: In addition to crude oil, India should explore alternative energy sources, including renewables, to reduce overall dependence on fossil fuels and enhance energy resilience.
• Monitoring Global Trends: Keeping a close watch on global oil market trends and OPEC+ decisions will allow India to adapt its energy strategy proactively, ensuring sustainable growth and stability in the energy sector.